Private Insurers Cautiously Dip Toes Into Florida Flood Market Waters

July 27, 2017 by Amy O'Connor

Florida’s efforts in establishing a private flood insurance market have been hailed as a model by many other states looking to buff up their flood insurance offerings, as well as the National Flood Insurance Program (NFIP) to follow as lawmakers hammer out its upcoming reauthorization.

But some insurance companies are still standing on the sidelines of Florida’s flood market pool, saying it’s not a risk they are ready to write.

At a recent flood insurance conference put on by the Florida Association for Insurance Reform (FAIR) in St. Petersburg, a panel of executives from four Florida-based companies and one national broker discussed their reasons for writing — or for not writing — flood insurance.

“I have not seen a predictable flood model, and I have not seen predictable pricing in reinsurance coverage for that risk. If I don’t understand a peril — I can’t quantify it, know what my exposure is — I am just simply not going to write it,” said Bruce Lucas, CEO and chairman of Florida homeowners insurer Heritage Insurance. “I’ve got some fundamental principles I follow in the business world and I have to fully understand what I’m getting into to do it.”

Locke Burt, chairman and president of Security First Insurance, another Florida-based homeowners insurer that doesn’t write flood coverage, said lack of demand from customers and regulatory hurdles make it difficult to do anything in the flood insurance space.

“There is a reluctance to innovate in Florida. Most of the companies who have filed a product have simply copied the NFIP program,” he said.

Florida’s high risk of storm surge, he said, is another challenge with flood because it is incredibly difficult for the private market to model and accurately price. He said storm surge is an example of why there will always be a role for a federal flood market.

“That is a very unusual peril and you do have tremendous uncertainty,” he said. “The private market is not going to take that uncertainty; the reinsurers aren’t going to take that uncertainty and the rating agencies aren’t going to let you take that uncertainty.”

“If you slice and dice the NFIP losses, I think a significant portion of them are the repetitive losses. What the federal government has to decide is what do you do with those repetitive loss properties? Those will never be insured by the private market,” Burt said.

While some insurers are hesitant to jump into the private flood market, Florida’s private insurance market has grown significantly thanks to legislation passed by the Florida Legislature in 2014. At least nine Florida-based insurers now hold a flood certification from the Florida Office of Insurance Regulation (OIR), and several other private insurers offer some form of flood insurance as well.

The legislation was designed to streamline the process for private insurers to offer coverage to encourage more flood insurance competition. It created a statutory framework that allows private insurers to offer four different types of flood coverage, including standard coverage, which mirrors current NFIP policies, as well as three other enhanced coverages.

This year, the Florida Legislature passed a bill that builds on the law in several ways:

Extends the time period during which private flood insurance rates may be established through an expedited rate filing to Oct. 1, 2025, from the same date in 2019. After that later date, insurers offering private flood insurance will be required to make a complete rate filing with OIR as required by state law.

Extends the time period that a surplus lines agent may export a flood policy without diligent effort from July 1 of this year to the earlier of July 1, 2019, or the date the insurance commissioner determines that there is an adequate admitted market for flood insurance.

Changes requirements for agents to notify private flood policy applicants of the potential effect of leaving the NFIP on premiums and of later reapplying for the program.

Exempts excess flood insurance from rules that require insurers to notify OIR 30 days before writing flood insurance and to file with a plan of operation and financial projections with the office.

Requires the Florida Commission on Hurricane Loss Projection Methodology to revise flood loss projections at least every four years instead of the current every odd-numbered year.

Florida’s flood insurance market began to develop out of necessity. Florida homeowners in high-risk flood areas with a mortgage from a federally regulated or insured lender are required to purchase flood insurance from either the NFIP or a private flood insurer. But NFIP rates in the state have been exceptionally high, according to lawmakers.

Currently Florida accounts for 37 percent of the NFIP’s policies but regulators and consumer advocates have argued for years that the state pays the most into the NFIP and gets the least amount back in return. Former Florida Insurance Commissioner Kevin McCarty said last year that residents of Florida are paying “disproportionately higher rates” compared to the rest of the country.

After the reauthorization of the NFIP several years ago, flood insurance rates climbed again and left Florida homeowners with flood coverage reeling at the expensive premiums.

Florida’s coastal communities are at extreme risk of storm surge after a hurricane-type event, making flood insurance even more important to residents of the state. Lawmakers say that the state needs a robust private insurance market.

“Flood insurance is critical [for those] living in Florida,” said former U.S. Representative Patrick Murphy (D-Florida), who worked on NFIP reform while in Congress with legislation that would have given state governments more control over the development of flood insurance regulations and allowed more involvement for the private sector.

He said enabling the private sector to take on some of the risk gives taxpayers some relief, and often the private sector can do a better job than the government.

“I think it’s critical the federal government and the private insurance market work together,” he said.

“We want to create the most fertile ground for any admitted carrier or insurance company to do business in the state of Florida in the flood insurance space,” Brandes said back in 2015.

Part of the difficulty in luring the private market into the flood space has come from the lack of transparency into ratemaking from the NFIP, which has said it is not allowed by law to share its data because of privacy reasons.

Insurers have been able to partly overcome that obstacle recently through other modeling sources, said Nancy Watkins, a principal consulting actuary for Milliman, an actuarial consulting firm in Seattle.

“Insurance companies for many years did not have that information, and they didn’t have any good way of measuring how risky a house was for flood peril. With catastrophe models over the last few years, and with a lot of big data sources coming available that didn’t used to be available, that problem has largely been reduced,” she said.

Even with its challenges, the insurance industry is not turning its back on the Florida flood market. Quite the contrary. There have been several new entrants to the state’s private flood market over the last 12 to 18 months, including TypTap, a flood insurance company formed by Florida-based Homeowners Choice Insurance (HCI) in 2016.

HCI said the TypTap’s website technology has been instrumental behind its success selling coverage. Potential customers enter their address and answer three quick questions, then choose an agent from a dropdown menu to purchase the policy.

“The technology is the big thing,” said Kevin Mitchell, HCI vice president for investor relations. “It really hit a chord with agents.”

Bob Ritchie, president and CEO of the Florida-based insurer, said the timing was right for the company because of the significant need for flood capacity in the state.

“The NFIP is a residual market — it is not manned by insurance professionals so it is always going to be subject to the political whims of the current administration and what the profit and losses are,” Ritchie said. “The private market should take more [policies] from the NFIP — and not just in Florida.”

Ritchie said the amount of available reinsurance was a big factor behind the company’s decision to enter Florida’s flood market. Its book is backed by $1 billion of catastrophe reinsurance.

“Any insurance company thinking they can take on this risk themselves are ill-advised to do that. The growth and support of this market would not exist without the reinsurance market,” Ritchie said. “But I am confident the private market can support this market. There are a lot of reinsurers throughout the world ready to take it on and spread out their capacity with reinsurers across the world.”

Even with that backing, he said it is still a market that needs to be entered carefully. American Integrity is selectively spreading its risk throughout the state and will not write in the highest-risk flood zones.

“I describe it as we are putting our big toe in the market, not even our feet yet. You need to go slowly,” he said.

Ritchie said there is plenty of opportunity in the space and consumers will welcome the support of private insurers after a large catastrophe event, which will also drive demand.

“When you have uncovered perils [like flood], good luck dealing with the federal government,” he said. “We don’t want anyone to have widespread suffering, but a major storm with surge and coastal flooding would be an opportunity to raise the bar on selling coverage.”

Still, he doesn’t think that the market will boom overnight. “This market is not like the gold rush — I think it’s going to take decades for any meaningful penetration in terms of private market share.”

With Florida’s available market of 6 million homeowner policies the market potential is huge, Florida Sen. Brandes told attendees of the FAIR conference in May. He said that consumer demand will be what ultimately entices the private industry to invest in the flood market.

“Right now, it’s just time. At the end of the day we need NFIP rates to rise for the private market to make sense in many areas. So, to the extent that we can develop our private market here in Florida, we can have professionals who are competent and capable of writing private flood insurance. Then as other markets become available we can enter those markets with a competitive product,” he said.

“There is no silver bullet here,” Brandes said. “The simple solution is have a great product, have the time it takes for the NFIP rates to continue to rise, and then be able to be competitive with your products.”

The support from lawmakers and regulators will be critical to the industry’s success, and Florida Insurance Commissioner David Altmaier told Insurance Journal in December that OIR will continue to work to ease the flood insurance cost burden for Florida consumers.

“The Florida Office of Insurance Regulation remains committed to fostering the development of a private flood insurance market to provide options and choice for Floridians,” Altmaier said. “To that end, we are continuing to work collaboratively with other state insurance regulators and the NFIP to evaluate available data and identify barriers to the facilitation of a private flood insurance market.”